Can I avoid California's $800 LLC franchise tax with a Wyoming or Nevada LLC?

I'm starting a small consulting business in Los Angeles. Everyone keeps telling me to form my LLC in Wyoming or Nevada to avoid California's $800 annual franchise tax.

Is this actually legit? Seems too easy. What's the catch?

The catch is it doesn't work if you're actually doing business in California. Like, at all.

I fell for this exact thing 3 years ago. Formed a Wyoming LLC, thought I was clever. Then I got a letter from the Franchise Tax Board saying I owed $800/year PLUS penalties and interest for the years I didn't pay. Had to register as a foreign LLC in CA anyway.

This is one of the most common misconceptions I see. Let me explain how it actually works:

California taxes LLCs that are "doing business" in California - regardless of where they're formed. If you form a Wyoming LLC but you live in CA, work in CA, and have clients in CA, you're doing business in California. Period.

The nexus rules under Revenue and Taxation Code Section 23101 are broad. "Doing business" includes:

• Being organized or commercially domiciled in CA
• Having sales, property, or payroll in CA exceeding certain thresholds
• Having a member who is a CA resident (for LLCs)

So if you're a CA resident and sole member of a Wyoming LLC, California considers that LLC to be doing business in CA.

Wait, so just being a CA resident triggers this? That seems aggressive.

What if I have a Wyoming LLC and only have clients outside of California?

Still doing business in CA if you're the member and you're performing services from California. The FTB looks at where the work is performed, not just where the clients are.

The only way to truly avoid CA's franchise tax is to:

1. Not be a CA resident
2. Have no property, employees, or sales in CA
3. Not perform services in CA

If you're physically in LA doing consulting work, you're doing business in CA even if your client is in New York.

Can confirm. I moved to Nevada specifically because I was tired of CA taxes. Now I legitimately don't pay the $800 because I don't do business in CA anymore.

But when I was living in San Diego with a Nevada LLC? Yeah, I still had to pay CA. The out-of-state LLC thing is mostly a scam sold by incorporation services who make money off forming entities.

What about the first year exemption? I heard new LLCs don't have to pay the $800 for their first year anymore.

Good point. Under AB 85, LLCs formed on or after January 1, 2021 are exempt from the $800 minimum franchise tax for their first taxable year. This applies if:

• It's the LLC's first taxable year
• The tax year is 15 days or more

So new California LLCs get a one-year grace period. But starting year two, you owe the $800 regardless of income. And if you have a Wyoming LLC doing business in CA, you still need to register as a foreign LLC and pay.

This is helpful but depressing. So basically if I live and work in CA, I'm paying that $800 no matter what.

Is there any legitimate reason to use a Wyoming or Delaware LLC if I'm in California?

Delaware makes sense if you're planning to raise VC money - investors prefer Delaware entities for the predictable case law. Wyoming is popular for holding companies and asset protection.

But for a simple consulting business operating in CA? Just form a California LLC. You'll pay:

• CA LLC filing fee: $70
• $800/year franchise tax (waived year 1)

Versus a Wyoming LLC doing business in CA:

• Wyoming filing fee: $100
• Wyoming registered agent: $50-100/year
• CA foreign LLC registration: $70
• CA $800/year franchise tax (still owe it!)
• Two sets of annual reports to file

You end up paying MORE with the Wyoming approach.

Also worth mentioning - the FTB is not messing around. They have data sharing agreements with other states and the IRS. If you file a federal return showing LLC income and you're a CA resident, they WILL find you.

I've heard of people getting hit with 5+ years of back taxes, penalties, and interest. Not worth the risk to save $800/year.

Alright, I'm convinced. Going with a California LLC. At least I get the first year free.

Thanks everyone for saving me from making an expensive mistake. The YouTube gurus pushing the Wyoming LLC thing conveniently leave out all these details.